Using linear regression analysis, Estate Lighting Company estimated its demand for a particular chandelier with the following results:
QE = 995 – 2.51PE + 1.78PC + 0.05I
where
QE = quantity sold per year of the chandelier
PE = price of the chandelier
PC = price of a competing firm’s chandelier
I = average annual household income
Assume that PE = $500, PC = $400, and I = $45,000. Calculate the firm’s quantity of chandeliers sold. Also calculate the price elasticity, income elasticity, and cross price elasticity of demand for the chandelier. What do these latter values reveal about the demand for Estate Lighting’s chandelier?
What would an R2 of 0.84 indicate?
Can you think of any important variable(s) that Estate Lighting has ignored in its demand estimation?